Regulation for a different world

Speaker: Nikhil Rathi, CEO
Event: Association of Foreign Banks – CEO Programme 2021 – The UK Regulatory Landscape Post-Brexit and Beyond
Delivered: 6 May 2021
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• The FCA will continue to be a regulator that supports open, competitive markets with responsible innovation.
• Our regulation of overseas firms is aimed at achieving the same high standards of conduct and behaviour as our regulation of domestic firms, and ensuring a level playing field.  
• International regulatory cooperation with other supervisors and global standard-setting bodies is ever more vital – working towards the same outcomes as other regulators allows us to defer to each other more and avoid duplication of regulatory requirements.  
• We recognise the increased flexibility that is available to the UK following exit from the European Union and will use this for the benefit of UK financial markets and consumers.
• Other key areas of focus in international regulation include ESG and the sustainability agenda, and dealing with financial crime.

Given the events of the last couple of years, it’s no surprise that so many of the financial services industry’s events at the moment have ‘post’ in the title. We may have finally gone from ‘post-financial crisis’ to ‘post-Brexit’ and, hopefully very soon, ‘post-Covid’. But of course, the really interesting question for regulators and for industry is always what comes next, and how we can shape that and prepare ourselves for it.

I’m looking forward to discussing some of the most significant issues and how we’re approaching them with you today. Of course, at this stage I can’t promise you with certainty as to how these issues will be resolved - but we want to be as open and clear as possible in explaining our perspective, our approach, and the outcomes that we are working towards.

Regulation and competition in UK markets

We have always been and will continue to be a regulator that supports open, competitive markets with responsible innovation; the UK is home to some globally important markets and we understand the role we play in that context and our global responsibilities. That means we understand the role that firms like yours play, and welcome them into the markets we regulate; in the banking sector alone there are over 200 overseas firms operating in the UK. Hopefully you will have seen our publication from February this year on our approach to international firms, and my colleagues and I look forward to hearing your perspectives.

In the wake of Brexit, some firms have restructured their activities to ensure they are able to operate across different jurisdictions and serve clients throughout Europe. UK financial markets have preserved their international role, with deep pools of liquidity available for investors and users across many markets. Through the implementation of their plans, international banks have been pivotal in ensuring that markets continue to operate effectively across borders. Well-managed and well-regulated structures provide important benefits, and we will continue to monitor developments. Any moves to restrict the ability of global participants to trade in the best interests of their clients, including in the UK, without sound regulatory justification would likely impact our objectives. We wrote to firms on this previously, to remind them of their obligations to prioritise and act in the interest of their clients. Our position hasn’t changed on this.

We are also mindful of the important role international firms play in helping ensure competition in UK markets, particularly as the FCA has a statutory competition objective. One of the consequences of a lack of mutual equivalence between the UK and the European Union (EU), for example on the derivatives trading obligation (DTO), is that it reduces choice and competition in the market. EU banks, for example, are now no longer able to offer to their clients, full access to all pools of global liquidity for the trading of interest rate swaps and certain credit derivatives, as UK venues have retained material market share in various products.

Our analysis suggests that, depending on the DTO instrument, between 65% and 95% of volumes remain traded outside EU venues. This loss of access to liquidity reduces competitive choice in the market for UK and rest of the world clients and, unsurprisingly, it has been reported that some EU banks have lost market share in these market segments. This means higher costs for EU firms, with a direct impact on the prices they can offer to their clients. And inevitably, UK and rest of the world clients, are left with no choice but to plan for further contingencies in which EU firms are unable to service a wider range of their needs.

Our regulation of overseas firms is aimed at achieving the same outcomes as our regulation of domestic firms, and ensuring a level playing field. We want to see high standards of conduct and behaviour, with appropriate protection for markets and consumers.

So, the rules and threshold conditions will remain the same for everyone, and we will apply the same standards to international firms seeking authorisation. But international firms can pose different risks, and we will take that into account in what we ask of them.

International firms that pose more risk to consumers, clients and markets can expect proportionately closer scrutiny and higher expectations from us, and they will need to have structural arrangements that enable us to supervise them effectively. In particular, we expect firms seeking authorisation to have an active place of business in the UK. For EU firms currently accessing UK markets via the Temporary Permissions Regime (TPR), as we move to a more permanent arrangement, there will be a rigorous review of all firms seeking to enter the UK authorisation gateway. Where we have seen misconduct, we have taken action to remove firms from the TPR to avoid harm to UK markets or consumers.

International cooperation and consistency

This makes international cooperation with other supervisors and global standard-setting bodies ever more vital. The more we and our international counterparts work towards consistent outcomes, the more we can have confidence in each other’s regulatory approaches. This allows us to defer to each other’s regulation, and thereby avoid duplication of regulatory requirements. Where we can’t be confident in the cooperation with our colleagues in other regulators, I think it is natural that we would be less confident in our ability to defer to them, and so be less willing to do so.

We have made significant progress in this area with much more underway. We have signed Memoranda of Understanding with regulators across Europe and with the European Supervisory Authorities, and have been working with the Government on the broader UK-EU Memorandum of Understanding on regulatory cooperation in financial services. We are building on existing links and the FCA’s reputation and experience, including close involvement in negotiations with Switzerland, to build stronger and better ties between our markets and allowing more openness and access.

We’re also part of a wider effort to build greater cooperation with the US and improve access to US markets – from supporting the UK Government in negotiations for a Free Trade Agreement, to more technical issues such as securing US Securities and Exchange Commission recognition for securities-based swaps dealers, and putting relief for UK trading venues on a permanent basis so that UK firms can trade with confidence.

Using our increased flexibility

Having said so much about consistency and alignment, though, I should be clear that we also recognise the increased flexibility that is available to the UK following exit from the European Union. We will use our autonomy to regulate for the benefit of UK financial markets and consumers. The UK was closely involved in the development of the EU’s regulatory framework; changes will therefore focus on tailoring those elements to the specificities and needs of UK markets and not simply diverging for the sake of it. And, while the likely effect of any changes to the UK’s regulatory regime on equivalence with the EU should and will be considered, it’s not consistent with the FCA’s objectives to target equivalence at any cost, including the opportunity cost of failing to make our markets work better.

In any event, our approach will be guided first and foremost by our continued commitment to high, internationally consistent standards and proportionate regulation. Some of these changes are within our gift, and we will work with industry to start implementing them – for example earlier in the year we proposed to increase the limit for contactless payments to £100, last week we opened a consultation on Markets in Financial Instruments Directive (MiFID) rules on research and best execution reporting. On other issues, we are working closely with Treasury on various recent reviews, for example Lord Hill’s review on listings, the Kalifa review of UK Fintech, and the ongoing review of the UK’s Future Regulatory Framework (FRF). The FRF will enable us to move more quickly to address harm when it arises, with appropriate mechanisms for accountability.

Global regulatory issues

Of course, there are also wider issues in front of us on the international agenda including sustainability and environmental, social and corporate governance (ESG).

We take our role in this area very seriously and want to build on our existing status as an international leader, and our work on climate-related disclosure in particular. The Government has now asked us to have regard to the aim of a net-zero economy by 2050, which has very significant implications for much of what we do and how we do it. Sacha Sadan will shortly join us from Legal and General Investment Management as our first Director of ESG to help us to understand these implications and how we can address them.

Another global challenge we are facing is tackling financial crime and money laundering. Financial crime and the criminal activity cause incalculable damage to society and is often carried out across borders. We endeavour to monitor entry, devise controls and erect barriers powerful enough to stop criminals from causing further harm. We play a full role in developing and promoting international standards in this area at the Financial Action Task Force and other international bodies.

Ensuring firms have adequate financial crime controls continues to be a key priority area for the FCA across the banking sector. Two of our biggest sanctions in the last 12 months related to failures to address financial crime and money laundering risks. So, it is vital that firms proactively consider financial crime risks and improve their own systems and controls as required.

At the multilateral level, we’re also working with global partners to develop a consistent understanding and response to the pandemic. Despite the resilience of financial markets to significant volatility and unprecedented operational strains last spring, we saw dislocations in some parts of the market, and these need to be addressed. To do this effectively requires a common diagnosis of the vulnerabilities exposed, which recognises the complex and intertwined issues in front of us.

Considering global regulatory issues in a joined-up manner such as this is precisely what the Financial Stability Board was established to do after the last financial crisis. With the focus now on the non-bank sector, we have been taking the same approach – one that starts with an agreed understanding of the risks, then seeks to address them in a way that reflects the globally interconnected nature of financial markets, and the interconnection of non-bank intermediation with the regulated system.

Transforming the FCA

I will finish my introduction this morning with an update on our transformation agenda and the work we’re doing to better equip the FCA for the challenges of the future. Following last year’s restructuring to bring together our Supervision divisions and merge them with Policy and Competition functions, we’ve added a number of excellent new colleagues to our senior team with a diverse range of private and public sector experience, and you can expect to see and hear much more from them as they get started over the coming months.

Now we have our structure and our team, we have a lot of work to do to deliver on the transformation agenda. One key area we’re currently focusing on is how we can properly set (or reset) people’s expectations for the FCA, so that they better understand the outcomes we are working towards – transformation will allow us to do much more with the resources we have and there are areas where we have to do much better, but there will still be a limit on what we can and should do.

We’ve been talking to Association of Foreign Banks (AFB) colleagues, wider industry and others about how to do this and have greatly appreciated people’s thoughts and input. Setting those expectations appropriately should give us a clearer basis for the improved regulatory regime we want to bring in, and the improvements we’re making across our data, our technology, our culture and our people will all be closely aligned to the outcomes we want to achieve.

Firms won’t necessarily see all of the changes as they happen, and some will take time to have an effect outside of the FCA. We’ll say more about how far we’ve come, where we’re aiming to get to and our next steps in July when we publish our Business Plan.

But I can say for example that you will see a tougher and much more effective gateway for new firms entering markets, with closer scrutiny of what those firms do post-entry. Our data strategy will move up the gears as we fix the fundamentals and increase our capacity to make better and faster use of data. And we’ll make more agile use of our Principles – particularly the requirement to treat customers fairly – so that we can respond to issues as they arise with firms who are not doing the right thing.

I hope I’ve given you a sense of how we’re approaching some of the issues that are particularly relevant to your firms and at the top of our agenda. Clearly it’s going to be vital for us to work effectively with you and with the wider industry to achieve the kinds of outcomes that I’ve described.